Patterns are formed by support and
resistance levels and by trendlines. We
concentrate on the patterns formed by support and resistance levels as
these tend to have a sounder conceptual base.

A criticism of patterns is that they are also evident in random data,
charts generated using random numbers. If the patterns appear in data
where there is no trend then what is their significance?

Go back to the largest possible time frame: the Dow Industrial Average
commenced in May 1896 at a level of 40, today the index stands at more than
10,000 - a steady up-trend for more than a century. The data is definitely
not random.

Empirical tests carried out on various point and figure chart formations,
by Professor Earl Davis of Purdue University were profitable between 70 and
90 per cent of the time in bull markets and between 80 and 90 per cent in
bear markets. Average gains (on profitable trades) were 2 to 3 times as
large as average losses (on unprofitable trades). Thomas Dorsey describes
the results of the 1965 study in Point & Figure Charting,
including which formations had the highest success rates.